Global Market Quick Take: Asia – July 18, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): S&P 500 and Nasdaq reach new highs; Intel and Nvidia gain; telecom stocks decline

The S&P 500 and Nasdaq 100 reached new record highs, with the S&P 500 climbing 0.4% to 4,522 and the Nasdaq 100 rising 1% to 15,713. Among the sectors, information technology and financials emerged as the top performers within the S&P 500. Intel (INTC:xnas) experienced a significant surge of 3.7%, while Nvida (NVDA:xnas) gained 2.2% as their CEO engaged in discussions with Washington officials to oppose potential new chip bans on China. Prior to the commencement of earnings reports from regional banks, the SPDR S&P Regional Banking ETF (KRE:arcx) bounced by 1.7%. On the other hand, telecom stocks declined as public outcry intensified following a Wall Street Journal investigation that exposed the presence of toxic lead cables left behind throughout the country. AT&T (T:xnys) tumbled 6.7% while Verizon (VZ:xnys) plummeted 7.5%.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields fall modestly by 2-3bps

Treasury gained modestly with yields falling 2 to 3 bps across the curve, in the absence of headlines. The weaker-than-expected data out of China added a bit to the Treasury market sentiment positively while Treasury Secretary Yellen’s optimism toward the US economy had muted reactions from the market. The 2-year yield slid 2bps to 4.74% while the 10-year yield fell by 3bps to 3.81%.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): CSI300 declines by 0.8%, HK closed due to typhoon

After a mixed bag of data, with GDP slightly disappointing but industrial production surprising upside, the CSI300 shed 0.8%, dragged down by coal mining, media, and financials. Inspur Electronic Information (000977:xsec) surged 5% after officials from the Ministry of Industry and Information Technology said the Ministry planned to boost the development of computing power infrastructure. In the automotive sector, Jiangling Motors (stock code: 000550:xsec) jumped 10%, reaching its daily limit. Hong Kong market was closed due to the typhoon.

FX: Dollar has trouble going higher

Dollar saw a brief high above the 100-mark on Monday but reversed lower subsequently as US NY manufacturing survey continued to re-affirm economic strength with prices cooling. USDJPY saw a similar spike above 139 but this was only partially erased. NZDUSD underperformed, slipping to 0.6320 ahead of tomorrow’s Q2 CPI release where consensus expectations are pointing to a cooling in headline inflation to 5.9% YoY from 6.7% in Q1 but still way above the central bank’s 1-3% target range. AUDUSD could face similar downside pressures and attempt a break below 0.68 as RBA minutes due today try to explain the July pause.

Crude Oil: weighed by weak Chinese data

Crude oil prices were stabilizing on Tuesday morning after slumping by over 1.5% on Monday as China activity data mostly came in below expectations and supply issues at the Libyan oil field were also resolved. Focus turns to US retail sales and regional bank earnings today to gauge the scope for more Fed tightening from here.

Base metals: China’s property sector woes underpin

Base metals slumped after weak economic data added to fears of lacklustre demand. Weakness in property investment in China also underpinned. Copper fell 2.3% to test support at $3.82 while iron ore was down 1.6%. Low stockpiles are however likely to limit the downside of any selling. Aluminum inventories on the LME fell to their lowest level since 11 April, with large drawdowns in Asia. Copper inventories are down nearly 25% this month and sit just above its 18-year low.

What to consider?

China’s Q2 GDP grows 6.3% Y/Y, June industrial production increases 4.4% Y/Y

China’s Q2 GDP came in at +6.3% Y/Y slightly weaker than the 7.1% expected but higher than the 4.5% in Q1.  The increase in the Y/Y growth rate in Q2 was due to the low base effect resulting from the Shanghai lockdown last year. Sequentially, growth slowed to +0.8% seasonally adjusted unannualized in Q2 from +2.2% in Q1. For the first half of the year, GDP grew 5.5% Y/Y, above the 5% target for 2023.

Industrial production grew 4.4% Y/Y in June, surpassing the 2.5% median forecast and 3.5% in May. June retail sales slowed to +3.1% Y/Y, from 12.7% in May, largely due to a high base in retail sales last June when Shanghai came out of lockdown. Year-to-date fixed asset investment fell to 3.8% Y/Y from 4% but it was better than the 3.4% projected by economists surveyed. Year-to-date property investment however contracted 7.9%, more than -7.5% expected and -7.2% in May. The unemployment rate remained at 5.2% nationwide as well as for the 31 major cities. The unemployment rate for youth (16-24 age group) increased to 21.3% in June from 20.8% in May.

Russia terminated Ukraine grain deal

Adding further concerns on the global food supplies after the weather vagaries, now Russia has formally withdrawn from a UN-brokered deal to export Ukrainian grain across the Black Sea, potentially imperilling tens of millions of tonnes of food exports around the world. Reasons cited were the drone strike that damaged a bridge to Crimea and non-fulfilment of agreement to allow Moscow’s agricultural exports. Recep Tayyip Erdogan said he'd try to persuade Vladimir Putin to reconsider. Wheat futures spiked on the announcement before erasing the gains later.

NY Fed manufacturing survey remains in expansion

The NY Fed Manufacturing survey for July remained in expansionary territory at 1.1, but slower than June's 6.6 albeit still above the forecast of a contraction print of -3.5. New orders saw a marginal increase to 3.3 from 3.1, while shipments cooled to 13.4 from 22 (moderating after June’s jump from -16.4). Prices continued to moderate, prices paid cooled to 16.7 from 22, indicative of rising prices, but at a slower pace than the prior month, while prices received eased to 3.9 from 9.

US retail sales and industrial production to shed further light on soft-landing narrative

June retail sales and industrial production out on Tuesday will be the key focus. Higher car sales following price cuts could drive retail sales and manufacturing activity higher, although expectations for industrial production remain muted with softening manufacturing PMIs. Bloomberg consensus expects retail sales for the control group (which feeds into the GDP) to increase by 0.3% MoM from 0.2% MoM in May, while industrial production is expected to be flat from -0.2% MoM in May. In-line data could keep the soft-landing narrative alive but strong upside surprises could reinforce Fed’s higher-for-longer message and disrupt the recent dollar downtrend.

China’s 1-year medium-term lending facility rate remains unchanged

The People’s Bank of China left its policy 1-year medium-term lending facility rate unchanged at 2.65%. The volume of RMB103 billion was only RMB3 billion higher than the RMB100 billion maturing in July.

China’s property sales decline in June

China’s property sales volume fell by 18.2% Y/Y in June, a faster decline than the 3% in May. Sales value plunged 19.2% Y/Y in June versus 6.8% in May. The steep decline was partly due to a high base in June 2022.

CEOs of US chip makers go to Washington to lobby against new ban on China

The CEOs of Nvidia, Qualcomm, and Intel went to Washington DC to meet with US National Economic Council Director Lael Brainard and National Security Adviser Jake Sullivan to lobby against the new restrictions on selling advanced microchips to China.

US regional banks start reporting on Tuesday

While results from Bank of America and Morgan Stanley would be the highlights among those banks reporting today, this time may be different. Investors are having their eyes on PNC Financial (PNC:xnys) and Western Alliance (WAL:xnys) which are the first two major regional banks to report Q2 results.

Tesla begins Cybertruck production

Tesla (TSLA) finally begun production of its electric pickup truck, the Cybertruck, after nearly four years since its initial prototype was revealed. The automaker is also planning to double the size of its factory near Berlin to produce up to one million electric cars a year, which could make the plant the largest auto manufacturing facility in Germany, according to WSJ citing documents filed in recent days. Meanwhile, Ford (F) lowered its F-150 Lightning prices and said it is taking advantage of increased plant capacity, continued work on scaling production and cost, and improving battery raw material costs. Tesla reports earnings on Wednesday.

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